Select Your Bond Fund Based on Its Components and Characteristics
It you’re looking for a bond fund that’s going to produce steady returns with little volatility and very limited risk to your principal, start with a bond fund that is built of low-volatility bonds issued by credit-worthy institutions. A perfect example would be a short-term Treasury bond fund. If you’re looking for kick-ass returns in a fixed-income fund, start looking for funds built of high-yield fixed-income securities.
One of the main characteristics you look for in a bond is its tax status. Most bonds are taxable, but municipal bonds are federally tax-free. If you want to laugh off taxes, choose a municipal bond fund. But just as with the individual muni bonds themselves, expect lower yield with a muni fund.
Also pick and choose your muni fund based on the level of taxation you’re looking to avoid. State-specific municipal bond funds filled with triple-tax-free bonds (free from federal, state, and local tax) are triple-tax-free themselves.